JDSU's Bid for the Enterprise

JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) announced last night its intent to purchase a portion of the microelectronics business of IBM Corp. (NYSE: IBM) for $340 million (see JDSU to Buy IBM Transceiver Division).

The deal will put JDSU squarely among suppliers of Fibre Channel interface converters for leading equipment makers. "[T]he extension of our product breadth into SAN and LAN networks broadens our addressable market to include customers that serve enterprise networks," says JDSU CEO Jozef Straus in a prepared statement. "Examples of new customers include Compaq, IBM, Sun, Dell, HP, Brocade, and Extreme."

What exactly is JDSU buying, and why?

JDSU is buying a unit of IBM's microelectronics business that makes transceivers and interface converters for storage area network (SAN) and gigabit Ethernet local area network (LAN) equipment, such as switches.

JDSU will pay $100 million in cash for the business, and the rest in stock. Another $85 million is payable at the start of 2003 if the business meets certain financial goals after JDSU's takeover. In a prepared statement, JDSU says it expects to record $300 million in goodwill for the purchase, "minus the in-process charge that will be based on an appraisal that will begin shortly."Analysts say that both IBM and JDSU should profit from the deal. "Although we feel the price tag was not a bargain basement price (we estimate 4.5X sales), overall, we like the transaction!" writes James Jungjohann of CIBC World Markets in a note today.

He and his colleagues say the deal expands JDSU's market reach and brings it packaging expertise and access to a valuable IBM circuit design team with expertise in silicon germanium and CMOS.

As a result of the acquisition, about 115 employees, most of them in Rochester, Minn., will be joining JDSU while staying in their present digs.

JDSU has several reasons for wanting this deal. First, it plans to expand its product portfolio. Today, JDSU's product line addresses optical networking in the telecommunications arena. This acquisition would make JDSU a supplier of enterprise optical networking components, such as those for Fibre Channel and Ethernet devices. And considering the overall economic climate in the telecom market, any new way to make money is welcome.

JDSU also plans to use IBM's component packaging know-how to combine its products and enter new markets. Specifically, JDSU plans to add its own lasers, modulators, and drivers to the optical semiconductor chips from IBM, in order to create so-called multirate transponders for use by SAN and LAN OEMs.The move reflects a trend toward integrating optical and electronic components in ready-made modules that contain all the parts that used to be available only on board-level interface cards.

Equipment makers crave smaller, prepackaged components that streamline the process of designing and manufacturing optical gear, both for telecom and datacom use. The trend's attracted established players such as Agere Systems (NYSE: AGR), as well as startups such as Network Elements Inc. and Optium Corp..

For its part, IBM says it wanted to sell the business as part of an ongoing effort to jettison nonstrategic elements of the microelectronics unit, which analysts say is "bleeding" money. Apparently, IBM has been shopping the unit for months, particularly to companies with big cash reserves, such as JDSU.

IBM wants to focus its development dollars more closely, particularly in the area of network processors, where spokespeople say Big Blue sees a more compelling opportunity than in traditional ASICs.

Analysts say the overall impact of the deal won't be huge for the market in general. "We see little change in the competitive landscape because of this move," writes Kevin Slocum of Wit Soundview in a research note today. He says IBM was losing ground to Agilent Technologies Inc. (NYSE: A) and Finisar Corp. (Nasdaq: FNSR) in the area of SAN and LAN chips and that "JDS will need to build its channel and stabilize the situation."JDSU shares ended the day at $8.20, down 0.20 (2.38%); IBM shares were trading at $122.70, up 1.19 (0.96%).

Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com